Glossary of Insolvency Terms

14 August 2017

We have introduced a glossary of some of the terms used on the main website. Unfortunately this business is full of jargon as are many others, but we thought the following guide would help the reader understand things in more laymans terms.

If you have any suggestions for additions to this please email us and we will happily add a section!

Administration When a company goes into administration, it is usually because it has fallen into financial difficulties, so an administrator is called in to run the company to see whether the company can continue or be sold so that new owners can turn the company around. If it can't then the company will be closed down and the assets sold to cover its financial responsibilities.

Administrator A person who acts as a controller of the company when a firm goes into administration. All company actions must go through the administrator and the administrator has overriding control over the whole business. He is appointed by the Court.

AGM An Annual General Meeting where the shareholders voice any issues and directors, give information of the past year and forecasts for the future, they also vote on any changes that are eligible to be made within the meeting, i.e. change of auditors and directors. This MUST be held every year. Does your company do this?

Arrears A term used when you have not paid invoices/made payments on debts and has built up and needs to be paid, if you do not pay the debt holder may take action to claim the money back.

Asset An asset is something which you own that holds value should you come to sell it, i.e. a house or stock etc

Bankruptcy An option that can be used if a person cannot pay their debts as and when they fall due, or they owe more than they own. This causes you to lose control of your assets and cannot be a company director for the period of the bankruptcy ban period. Bankruptcy also adversely affects your credit rating.

CCJ A County Court Judgment or court action where a company/person will take you to court because you have not paid a debt. The court will order you to pay the debt within an allotted time and if you dont the company will be able to take further action.

Companies House This is where ALL Ltd and PLCs are registered, they store all information and make this info available to the public i.e. accounts, directors. Companies House also act to incorporate and dissolve companies

Credit Rating A tool that banks and financial service providers use to assess how likely you are to be able to honour your debt, if you have a good rating you will have access to more funds than if you have a poor rating. Your rating is assessed on whether you have defaulted before or have any court judgements.

Creditors A company or persons who owe money to another company for services provided. Creditors are classed as liabilities as it is money outstanding

Creditors petition (bankruptcy) Creditors can petition for a debtor to be made bankrupt if an individual creditor is owed more than £750. Alternatively, creditors can join together to meet the £750 requirement. Proceedings normally take place at the debtors local county court with bankruptcy jurisdiction. Creditors can only ask for someone to be made bankrupt if: the debt is unsecured; and for a fixed sum which the debtor appears unable to pay.

CVA A Company Voluntary Arrangement: Where a company is in an insolvent position a CVA may be used in order to set up a deal where a percentage of the debt is paid over a period time in order to ease the current cash flow problems and pressure on the directors. This allows the directors to focus on improving the business.

CVL Creditors Voluntary Liquidation: The liquidation of a company means to cease trading, sell all the assets and terminate all contracts. It is initiated by the shareholders of the company and done by an insolvency practitioner (see below).

Debtors A company or persons who owe you money for services you have provided, but not yet paid for. Classed as a current asset.

DBIS - Department of Business, Innovation and Skills: This has replaced the DTI. It is a Government agency which acts in the interests of all and aspire for higher productivity in all industries by promoting enterprise innovation and creativity. The DeBIS also aid in employment issues such as redundancy. The DeBIS runs the Insolvency Service in England & Wales.

Debtors petition (bankruptcy) Where a debtor decides they want to make themselves bankrupt, in order to do this the debtor must petition to the county court. See bankruptcy above.

Directors The decision makers of the company. The directors control the business and are responsible for its successful running and management. They're protected from personal risk by limited liability, but generally only if they act correctly!

Directors Disqualification If a person is declared bankrupt or has committed certain insolvency offences then he or she can be barred from acting as a director by the DTI. It becomes illegal for that person to be a director or manager of a company for the period of disqualification.

Dissolution A process that legally breaks up a company that no longer wishes to trade. In order to start the dissolution process the company must have ceased trading for 3 months.

Distraint - A popular tool for landlords where rent or other payments are not made. If the landlord has agreed a payment deal and the company is not keeping to it the landlord has various powers. Distraint means that an agent of the landlord can effect entry to remove goods or assets for sale to pay for the debt due. He /she does not need to wait for a long period for this to happen. In theory 1 week after a rent payment is due they can distrain. Nor does he/she need a judgment.

Domino effect - If a partner as an individual has an insolvency problem (perhaps from overspending/borrowing, gambling or drinking (or all of these)) and is being pursued by a creditor(s) this can lead to problems. It is even possible for the spouse of a partner to become insolvent, thus leading to the loss of the matrimonial home which, for example, may underpin security granted to a bank.

Factoring A service provided by financial institutions such as banks and lenders who pay the company for unpaid invoices and help collect the remaining funds for a fee and they charge for lending the company money for a period until the debt is repaid.

Fixed and Floating Charge - A mortgage, debenture or other security documentation, is likely to create charges over particular assets as security for borrowings or other indebtedness. There are essentially two types of charge, floating and fixed. A floating charge is appropriate to assets and material which is subject to change on a day to day basis, such as stock. Individual items move into and out of the charge as they are bought and sold in the ordinary course of events. The floating charge crystallises if there is a default or similar event. A floating charge is not as effective as a fixed charge but is more flexible.

Fraudulent trading Put simply fraudulent trading is the continuation of trading with no reasonable prospect of repaying debts and with the intentions of defrauding creditors.

Going Concern Where the company is continuing to trade for the current period and can cover its costs and make some money.

HMRC Her Majesty's Revenue and Customs: the government body which collects and regulates PAYE, NIC VAT etc

Insolvency practitioner A professional who specialises in insolvency and is licensed by the DTI. Insolvency practitioners often act to close a company in the best possible way for all parties involved. Only IPs can be a liquidator or Administrator.

Insolvent A term that is used when a company/person cannot pay or cover their debts with the assets or funds they have as liabilities exceed assets.

Insolvent company A company that cannot pay its debts as and when they fall due. The company will suffer from major cash flow problems and cannot pay what it owes thus it is insolvent.

Interim order - When someone is applying for an IVA (see below) they can ask the court to protect them from legal or bankruptcy actions by someone they owe money to.

Investigating accountants - Accountants who look at the business you run for the bank that is lending it money, they check accounts, forecasts, marketplace and management. The real reason the banks appoints them is to find out how secure debt is that the company holds! See a guide to Investigating accountants.

IVA An Individual Voluntary Arrangement: Very similar to a company voluntary arrangement. However the IVA is for individuals as opposed to companies and removes the burden of personal debt to make a fresh start and improve their lives.

Joint Several Liability - Joint and Several Liability implies that all members are liable for the partnership debts in full or in part individually, dependent usually on their ability to pay. Thus a creditor(s) /liquidator can "go after" the member with the most assets to satisfy debts then the next and so on until all debts are satisfied or until all partners made bankrupt.

Liability A Liability is something that you owe to somebody, i.e. a mortgage, loan payment credit/store cards.

Limited Company A business that legally sets itself as a separate person so that its directors and shareholders are not liable for any of its (proper) actions. The businesses are usually privately owned.

Limited Liability A mechanism that allows Limited company and PLC shareholders to limit there responsibilities if the business falls into difficulties, where shareholders will lose no more than there investment in the business should it default.

LiquidationWhen a company dies. Once the process starts the company is administered by a liquidator who disposes of all assets, and distributes the proceeds to creditors and any remainder to shareholders. The company is then struck off from the companies register once this process is complete.

Liquidator - A liquidator is a person responsible for dealing with the winding up of a company and he/she must be an insolvency practitioner.

Moratorium - A period of time during which a certain activity is not allowed or required. Usually a moratorium is put in place to protect a person, business or company

No fault bankruptcy - Under the Enterprise Act 2002 the UK Government significantly relaxed the rules regarding bankruptcy. From April 2004 the sole trader or partner in a partnership, who has a failed business (where there are no issues of fraud, misfeasance, recklessness etc) is able to file for bankruptcy (see process above) and be discharged from that bankruptcy within say 12 months.

Nominee A nominee is a licensed insolvency practitioner who helps propose a deal with their creditors under a proposal of a CVA/IVA and deals with legal issues and compliance such as chairing the creditors meetings, checking management accounts and forecasts.

Official Receiver - The Official Receiver is a civil servant in The Insolvency Service and an officer of the court. He (or she) will be notified by the court of the bankruptcy or winding-up order. He will then be responsible through his staff for administering the initial stage. This stage includes collecting and protecting any assets and investigating the causes of the bankruptcy or winding up.

Partnership Similar to a sole trader, however there is more than one owner and there can be several different people that own different amounts of the business.

PAYE Pay As You Earn: A government scheme where your tax is deducted from your monthly wage and paid for you by your employer so that you do not have to calculate your own tax and National Insurance payments. The employer is responsible for collecting this tax and paying to the government. Failure to do so on time is a sign of insolvency

Pension Fund This is a pot of money into which contributions are made to build a fund to pay retirement pensions and funds that are drawn on to pay these pensions to ex-employees who were eligible for a pension.

Personal Guarantee A personal guarantee is a tool which financial service providers can use to guarantee their debt by requesting the director or partner in a business to personally guarantee the debt regardless of whether the debt is used by the company or not. Should the debt default, then the bank will call on this personal guarantee and the guarantor may/will have to pay the remaining debt.

PLC A Company that trades shares of its business on the stock exchange which can be owned by anyone. The company has limited liability and are generally quite large firms and have to disclose all actions. The minimum share capital level is 50,000 and it must file annual accounts within 6 months of the year end.

PVA A Partnership Voluntary Arrangement: The same process as a CVA however this is used for a company that is a partnership as the proprietors are joint and severally liable. The PVA has the same benefits as the CVA.

Receiver A receiver is appointed by a bank normally to collect and administer a company's assets. The receiver then has a duty to collect the bank's debts only by selling the assets; he/she is not generally concerned with the other unsecured creditors or shareholders exposure.

Receivership When a company defaults on a loan or payment the debt holder can call on a receiver to go into the company to sell the companies assets in order to pay back some or all of the debt. The company in receivership will lose control of the business while the receivers sell the assets and the company will usually be liquidated, the business may be sold and there is usually a loss of jobs.

Redundancy A reason for dismissal, redundancy involves the closure (either temporary or permanent) of the business as a whole or closure of a particular department this could suggest that the business has no further use for the department you are working in, are downsizing or could be facing difficulties.

SFLGS Small Firms Loan Guarantee Scheme: By providing a government guarantee against default by borrowers, the Scheme enables high street banks and other financial bodies to lend between £5,000 and £250,000 to new and existing businesses. The DTI underwrites 75% of the loan. So if the company failed the bank will be able to claim up to 75% back form the DTI.

Shareholders Owners of the business, someone who has bought shares on the open market if it is a quoted PLC. Or owns a stake in a limited company. They have a say in how the business is run and earn a share of the profits as a dividend.

Simultaneous Voluntary Arrangements - Basically as the title suggest the mechanism is to link together a number of simultaneous individual voluntary arrangements to protect the partnership and the individual debtors. It allows the partnership arrangement to deal with partnership debts and individual arrangements to deal with any individual debts. It also protects the individual partners from the "fallout" of the partnership debts to the individual.

SOFA Statement Of Affairs: A statement of what you own, what assets you have and your liabilities and cost of living to summarise your financial affairs

Sole Trader An owner of a business who is wholly responsible for the day to day running of the business and its debts. They are generally small firms with few employees

Statutory Demand - Usually this action is taken after a creditor has obtained a Judgment. It is a formal demand for payment of an undisputed debt (over £5000 from 1st October 2015) - the debt must be paid within 21 days of the demand being issued. Failure to pay a statutory demand can lead to a winding up petition or bankruptcy being issued. In any event, the creditor has to pay to issue this document/action and therefore he/she/it is now becoming much more serious.

Supervisor The Supervisor collects payment of CVA/IVA contributions and ensures that contributions are kept up to date; failure to keep up to date can cause the supervisor to default and abort the CVA/IVA leading to liquidation/bankruptcy.

Trading Out working through problems, this phrase is used where you continue to trade through tough times in order to rectify your problems and improve your company's health.

Trustee in bankruptcy A Person who holds property in trust for another. In bankruptcies the IP holds the property of the bankrupt in trust for creditors and is referred to as the trustee.

Turnaround practitioner An advisor who specialises in helping ailing companies solve their problems and get back on their feet, a simple analogy of this would be to describe a turnaround practitioner as a company doctor.

Turnover the money that a business takes in over a period of time through its activities is known as turnover. It is not all PROFIT!

Unique Selling Proposition (USP) why do your customers buy from you what is it about your product and/or service that distinguishes your from your competition)? You may have more then one for different product/service lines or segments of your business.

VAT Value Added Tax: A duty that is paid on qualifying goods of 20% above the company's selling price less any VAT paid for goods the company has bought in the same period. This is collected by companies for the HM Revenue & Customs.

Walking Possession - A bailiff (for the County Court) or Sheriff (for the High Court) has visited your premises and obtained entry. He /she has asked for payment of the proven debt. If you have not paid this plus the court and his costs he can "take possession" of the goods, equipment, fixtures, stock etc on the premises. Effectively if you do not reach a deal or pay in full he can remove and sell the assets in 5 days. To sell the assets after they are covered in this way is a criminal offence. If the bailiff has obtained a walking possession he can force entry to recover the goods after the 5 day period.

Warrants - In law, a warrant can mean any authorisation. Often in statute the warrant of a particular person is required before certain administrative actions can take place. As the creditor has not been paid under the judgment the creditor can apply to the court for a warrant of execution. If the debtor is in another area the court can forward this to the local court. A notice of warrant will be issued to the debtor. If payment is not made a bailiff of the court can be sent to collect payment or seize goods.

Wrongful trading - A Director may be held liable for wrongful trading if they allowed the company to continue in business when they knew or ought to have known that there was no prospect of meeting the company liabilities as they fell due. Put simply lying about the current state of the company and hiding from reality.

WUP Winding Up Petition: A tool that can be used should a debtor continuously refuses to pay its debts so the company presents its petition to the court to have the company closed down.

Summary

Most of the items above are mentioned in more detail on the site somewhere, try using the search facility to find more detailed guides.

If you have any suggestions for further additions, or do you think the explanations above are still slightly confusing then please let us know!

Legal advice: Clearly the descriptions are designed for general understanding, they may or may not be absolutely correct in every circumstance, we disclaim any potential or actual liability arising from any reliance upon any description in this glossary or any guide on this site.

Just a quick note to say a big thank you to all the staff at KSA, our CVA was passed today by creditors voting in an overwhelming number including HMRC to accept the proposal as prepared by KSA.

The road to reach today’s conclusion has been bumpy, but at each stage your team has supported and guided us through the issues and we have reached a very satisfactory outcome to the benefit of customers, staff, all creditors and shareholders.